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Lucky country or not: Fariborz Moshirian on the state of the Australian economy

July 17, 2018

​Fariborz Moshirian is a professor, an AGSM scholar and the director of the Institute of Global Finance (IGF) at UNSW Business School. The IGF conducts collaborative research on systemic risk, financial innovation and global financial stability. Moshirian spoke with Julian Lorkin for BusinessThink.

An edited transcript of the conversation follows.

BusinessThink: What is the state of the Australian economy?

Fariborz Moshirian: Well, at the moment we are in good shape, I have to say. With 3%-plus economic growth we should be quite thankful. But also, the Australian economy has been very flexible in recent times. For instance, we know that in 2011 the interest rate was 4.75%. And now it's 1.5%. The cash rate is 1.5%.

As we went through the mining boom and then the slowdown in mining, and some of the global factors, we've seen that interest rate has come down substantially. At the same time we know that the Australian dollar in 2011, if you remember, was buying $US1.1. Now it's only buying something around US75c.

In other words, we've been able to adjust some of the economic factors in order to adapt ourselves to the changing world which has gone through a global financial crisis, a European sovereign debt crisis, and trade challenges, and of course at the present time some other factors which are disturbing the global economy.

BusinessThink: And yet, if you look at the numbers behind it, we've got very low unemployment. Normally that would feed into inflation, hence we would have high interest rates. It seems a bit of a conundrum at the moment but that's exactly what we don't have. It seems totally benign.

Moshirian: That is a very good question and is a question that could be raised in many parts of the Western world. For instance, in the US they are struggling to generate inflation. In Europe they're struggling to generate inflation and the same thing applies in Australia.

In effect, since the global financial crisis we are rewriting the text on macroeconomics. And so we are really in search of how to generate inflation so that we can basically raise the living standard of people by increasing wages and creating more economic activities. That is a challenge for Australia and also, I have to say, for Europe and the US and Japan.

'I think whatever is happening in Asia is going to influence Australia, either positive or negative, so we need to be prepared for that'


BusinessThink: Is Australia nimble enough to get ready for the 21st century when Asia is going to be our biggest trading partner and we're likely to have yet more economic shocks?

Moshirian: I think that's an important issue for Australia. And as you said, we need to diversify the economy. We need to not necessarily rely only on the mining sector; we need to seize the opportunity when it comes to agriculture, when we're dealing with significant millions of people who are now middle-income consumers who want to have more meat, more deep-quality foods. We can be in a very good position to invest in that, as well as obviously other sectors such as education, wealth management, etc.

BusinessThink: Are we going to need a lot of infrastructure to be able to do that?

Moshirian: That's an important issue and I think for that very reason the Australian government now is investing, or planning to invest, a significant amount of funds into infrastructure which are going to facilitate, if you like, the strong economic productivity, stronger coordination among the states, and ensure that we have better economies of scale and also tap into the talents of entrepreneurs, who are going to create more innovation and more jobs.

BusinessThink: Oh, they certainly are. That's going to be boosting our GDP. But it seems that we're terribly exposed at the moment to both regional shocks and global ones. Let's start off with the regional dangers?

Moshirian: I think regional shocks and possibly some unseen risk are always with us. I mean, China, as you know, is the largest trading partner for Australia, and then we are looking at Japan and the US. We are relying on the prosperity of China and to some extent also on India down the track. And I think whatever is happening in Asia is going to influence Australia, either positive or negative, so we need to be prepared for that. There is no question about that.

BusinessThink: And equally, the South China Sea seems to be a flashpoint at the moment. Nothing's really ignited as yet but it seems to be an ever-present danger with our largest trading partner?

Moshirian: I think [that] always, when you look at the regional issues, we are not only talking about economics. Politics is always associated with economics and there is no question that some of these political tensions among our neighbouring countries and those countries with China are creating some tensions. But I'm hopeful that political tensions are not going to stop the flow of healthy trade between Australia and Asia.

BusinessThink: But if we're looking at political dangers, look at what's happening in Europe at the moment. That seems to be a massive danger to the global economy.

'I’m hoping that this time round, trade doesn’t become a tool for protectionism and also slow down any economic activities'


Moshirian: I think that is the crux of the matter because Australia is a small economy; we are relying on the international economy and world economic activities. If Europe is going through massive turmoil of identity – nationalism vs globalism, nationalism vs integration – [and] what we are seeing in the US – trade war between US and China, both our largest trading partners – they are some of the issues which could affect confidence in investment in Australia, as well as the level of employment.

Also, we shouldn't forget that the financial system, the global financial system, hasn't been fully repaired since 2008-09. There are always risks that there could be another global financial crisis given the fact that we are dealing with massive exposure of banks and non-banks to various derivatives and other instruments. There are going to be some unknown global risks that we need to first of all weather, and learn also how to navigate when these global risks hit the Australian economy.

BusinessThink: Haven't we had a decade since the global financial crisis to get our house in order, to ensure the banks are totally robust?

Moshirian: I think that's a very good question and I think we all had soul-searching in Australia, in Europe, in Japan and in the US. The banking sector definitely is stronger, much better than, say, 2007-08. But at the same time, global banks also became much larger; they are more exposed to five continents; their activities go beyond national boundaries. That means basically anything could happen to any of these so-called systemically important financial institutions and so we shouldn't underestimate the risk associated with our financial system.

BusinessThink: Particularly if there's a trade war, as again it seems that we haven't learnt the lesson of even the 1930s – trade wars are generally bad for the economy. We have a looming but not actually a trade war at present. Is that a huge danger?

Moshirian: I think what in effect generated the Great Depression in 1931-32 was basically a trade war. Protectionism. And we've been very lucky during 2007-08 and beyond. We tried as part of G20 to stop a trade war and we were to some extent successful and I'm hoping that this time round, trade doesn't become a tool for protectionism and also slow down any economic activities.

BusinessThink: Can we say then that the Australian economy actually isn't doing too badly? We've got a four-pillars policy for the banks which means they're relatively strong. Are you optimistic?

Moshirian: There is no question that we are the lucky country, as we know, and Australia has basically traversed very well over the past 25 years or so. We didn't have a recession in recent decades and we are well positioned to prepare ourselves. Rather than be complacent that we are the lucky country, [we need] to prepare ourselves for both regional as well as global shocks, and at the same time invest in infrastructure and in our human capital to become a more resilient economy for years and decades to come.

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